MattAndrejczak

GaryOlson

Titan, a San Diego-based defense electronics company, had failed to meet a Friday deadline calling for it to strike a plea agreement with the Justice Department to resolve bribery allegations.

Lockheed Martin spokesman Jeff Adams said the June 25 deadline was set to remove the uncertainty that could have continued indefinitely over Titan's legal matters.

Revised terms of the purchase and merger, first announced last September, had set the Friday deadline. An extension into September was possible, but Lockheed Martin told Titan late Thursday it would not extend the closing of the merger a third time. Lockheed Martin said it declined a request from Titan to extend the deadline.

Reacting to the termination Saturday, Titan Chairman and Chief Executive Gene Ray said in a statement that he expects "continued growth and record revenue for 2004." Ray said that Titan has a $5 billion backlog of government contracts and that all general managers of business units had stayed through the pending merger period.

Ray expressed disappointment the merger was not completed. In Saturday's San Diego Union Tribune, Ray said ahead of Lockheed's announcement that a goal is to rebuild Titan's investor relations, noting the company had not held a conference call with analysts in six months. Ray, 65, was planning to retire if the acquisition had been completed, according to the Union Tribune, but will stay on now as chief executive.

In trading Friday, the expectation that the deal would collapse crushed Titan
TTN
shares. The stock fell $3.69, or 20.2 percent, to $14.55. Titan shares moved up a few pennies in Friday after-hours trade.

Shares of Lockheed Martin
LMT, +0.34%
the world's biggest defense contractor, fell 14 cents to $51.97. For the most part, investors welcomed the outcome. Some analysts thought Lockheed Martin was paying too much for Titan.

The merger agreement called for Titan to pay $60 million in break-up fees under "certain conditions," but Lockheed Martin's Adams said no fee would be required. As of March 31, Titan had reported about $20 million in merger-related costs.

Bethesda, Md.-based Lockheed Martin leaves the failed deal in better shape than Titan. It has about 130,000 employees and reported about $32 billion in 2003 revenue.

Separate criminal and civil investigations into Titan's overseas dealings are likely to stretch for many more months. Titan will also have to sell Wall Street on its business plan; it hasn't updated its financial projections in nine months.

And given that Titan has lost several midlevel managers in recent months, "rehiring and retention will be a key operating challenge for the company in the coming weeks," said Edward Caso, a Wachovia Securities analyst.

Potential suitors, observers add, are not likely to bid on Titan until the federal investigations are resolved.

Analysts speculate Lockheed Martin will not look for another acquisition, but instead will use its $2 billion cash stockpile to buy back stock. Lockheed-Martin's Adams said management will be exploring dividend and stock buyback options.

Defense technology

Titan, with about 12,000 employees and 2003 revenue of $1.8 billion, integrates computers and communications system for the federal government and military. One of the plums of an acquisition would have been an estimated 8,800 Titan technical workers with security clearances.

A military command-and-control system, described by Titan as "the cornerstone of our expertise," was used in Afghanistan and Iraq to provide a battlefield picture from different sites -- all assembled from surveillance using satellites, computers and data lines. Titan is also working on a high-speed attack boat for the Navy, unmanned surveillance aircraft that carry bombs and satellite systems for ground forces that don't require reception dish set-up.

Other services include operation of online communication systems for the government and a cashless system that lets Marines and the Navy use ATMs around the world, including on naval ships. Titan also has contracts with the Department of Homeland Security.

Titan's net income for 2003 was $29 million following net losses of $275.1 million in 2002 and $98.6 million in 2001. Government contracts make up 96 percent of its business, according to filings, and cannot be halted by federal officials without penalties.

Lockheed had agreed to buy Titan in a $22 a share offer announced Sept. 15, 2003. In the due diligence for the acquisition, possible violations of federal law surfaced publicly in February regarding allegations that foreign officials were bribed. That led to Justice Department and Securities and Exchange Commission investigations.

The acquisition accord was amended in April, lowering the offer price to $20 a share and setting Friday's deadline. To proceed with the purchase, Lockheed has insisted that Titan either be cleared of the allegations or receive written notice from the Justice Department that no criminal charges would be filed. Titan has said it set aside $3 million for possible fines related to the investigation.

In May, further scandal arose as Titan translators were connected to torture allegations in Iraq. Titan has a $657 million contract to provide linguist services to the military, and that is under review.

In early June, Titan disclosed that it received an SEC "Wells notice" warning of alleged violations of securities laws. Titan has said it is cooperating with all investigations.

In its most recent 10-Q filing, Titan said it had about $17.6 million in quarterly costs related to the merger, with $5.7 million tied to the acquisition and $11.9 million connected to the investigation. Titan's 10-K reported about $2.2 million in 2003 costs related to the merger.

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